Lawyers, companies set to profit from huge growth in global arbitration against Canadian government

Process is skewed in favour of international investors and the arbitration industry, report claims

Prime Minister Stephen Harper looks as Minister of Foreign Affairs John Baird, left, shakes hands with Chinese President Hu Jintao before their meeting at the Great Hall of the People in Beijing in February. Economic deals with China and the EU will amplify the booming business of investor-state dispute arbitration, a new report says.

Photograph by: DIEGO AZUBEL
, GETPICS

OTTAWA – The number of potentially costly lawsuits filed by foreign firms against the Canadian government is expected to rise with the pending ratification of investor-protection agreements between Canada and two of the world’s three largest economies.

These deals with China and the European Union will, in turn, further amplify the booming business of investor-state dispute arbitration that has soared 12-fold since the 1990s, according to a new report.

There are thousands of bilateral agreements around the world, including more than two dozen involving Canada, and they generally prohibit governments from discriminating against foreign firms and/or expropriating property without legal due process and fair compensation.

Investor-state arbitrations involve a panel of three individuals — one appointed by the state, another by the investor, and a third agreed to by both parties — who determine whether a government has violated the terms of investor-protection agreements.

Canadian taxpayers have already shelled out $157 million in penalties or settlements, not including hefty legal fees, as a result of lawsuits launched using investor-rights protections written into the 1994 North American Free Trade Agreement with the U.S. and Mexico.

The vast majority of that sum — $130 million — came from a single federal government settlement in 2010 that followed former Newfoundland Premier Danny Williams’s expropriation of assets belonging to AbitibiBowater, now Resolute Forest Products.

And corporate lawsuits against Canadian government actions will inevitably rise given Canada’s plan to ratify investor-protection treaties with two of the world’s three largest economies — China and, pending the conclusion of Canada-European Union free trade talks, the 27-nation EU.

These treaties give foreign companies property rights that Canadian leaders chose to deny its own citizens when the 1982 constitutional agreement was negotiated, a point raised recently in the House of Commons by Ontario Tory MP Scott Reid.

“In Canada, property owners also have a legal right to compensation — just as long as they are Mexican or American,” said Reid, a fervent proponent of constitutionally-entrenched property rights in Canada.

A report released last week by two European advocacy groups, the Amsterdam-based Transnational Institute and the Brussels-based Corporate Europe Observatory, was scathing in its criticism of the global arbitration industry, in which Canadian lawyers and law firms are active players, though well behind American and British firms.

It argued, among other things, that the legal industry tends to favour “expansive” or liberal interpretations of investment treaties in order to encourage further claims — and therefore prompt even more legal fees to flood into their firms’ coffers.

The paper also argued that too many lawyers are wearing too many hats — acting as either litigators for states or companies when they also, at different times, serve as arbitrators in the three-person panels established under the thousands of investor protection treaties struck around the world.

Lawyers who profit from the industry also play a hugely influential role in helping countries draft treaties, and later influence public debate through academic articles, speeches and media commentary, according to the report’s authors.

“It’s not balanced, it’s not fair, it’s skewed in favour of the interests of investors and the arbitration industry,” report co-author Pia Eberhardt told The Vancouver Sun.

“I think Canada would just increase its vulnerability for being sued for regulations, simple regulations, many of them in the public interest,” by opening the door to lawsuits by Chinese and European corporations.

Canadian and EU negotiators are in the final stages of a comprehensive trade and investment treaty that is widely expected to include an investor-protection mechanism similar to provisions in NAFTA and 24 other Foreign Investment Protection and Promotion Treaties Canada has inked with individual countries since Ottawa began seeking such deals in 1989.

Critics point out that neither the U.S. nor China has ever lost an arbitration, with University of New South Wales law professor Leon Trakman asserting in an October paper that a case against China would likely be “contentious, costly and dilatory.”

Some trade experts and industry participants say the statistics of dispute outcomes don’t support the paper’s argument, since states tend to win slightly more than half of all cases.

“If it’s a biased system, it’s not biased all the time. States win a significant number of cases,” said University of Ottawa trade law professor Anthony VanDuzer.

They also note that the state has a right to choose one of the three panelists, and jointly chooses with the investor the chairman. If the two parties can’t decide on the third panelist, that person is appointed by the Washington-based International Centre for Settlement of Investment Disputes, an autonomous body established by the World Bank.

And it’s hard to argue that ICSID, a government-created entity, would have a pro-investor bias, according to the system’s supporters.

The report names a couple of prominent Canadian lawyers among the world’s most active arbitrators — former Liberal cabinet minister Marc Lalonde and former Canadian ambassador to the UN Yves Fortier.

Lalonde said the critical report appears to be well-researched, though he said the authors used “somewhat misleading” statistics and “inflated language” — a reference to their charge that arbitration lawyers and the private equity firms that sometimes fund lawsuits against states are global “ambulance-chasers.”

The arbitration system has “built up a fair amount of credibility,” said the former senior Liberal cabinet minister under the late prime minister Pierre Elliott Trudeau.

“This is not a jury trial in Mississippi where you’ll know what (verdict) you’ll get.”

And he said the staggering costs of launching a lawsuit mitigate against frivolous actions.

“It’s nice to say ‘oh, well, these guys are kind of ambulance-chasers or have got third-party financing just going for the money.’ But you have to realize even when you’re a claimant, you have a fair amount of money at risk.”

McGill University trade law professor Armand de Mestral, who has occasionally worked as an arbitrator, is among a number of commentators who believe the international arbitration system would benefit from a permanent appellate body to ensure greater consistency in rulings and to respond to critics claiming a bias or inherent conflict of interest.

But “I don’t see it as a corrupt system,” he added, since there are well-regarded lawyers constantly advocating before arbitration panels in favour of the interests of states.

Fortier, who was involved in an arbitration and unavailable for comment, cited potential conflict issues when he left his Montreal law firm Ogilvy Renault after the completion in 2011 of its merger with the London-based global giant Norton Rose.

“Being an international arbitrator as a member of a global legal practice can create inherent conflict risks,” Fortier said in a 2011 news release.

“My decision to leave the firm was motivated by the need to continue my international arbitration and mediation practice in an independent and impartial way.”

The critical report, called Profiting from Injustice, said the number of international arbitration cases has jumped to 450 last year from 38 in 1996.

The paper argued that law firms encourage legal cases, “often against countries in crisis,” resulting in a twelve-fold increase in arbitrations since 1996 by multinationals against states that took actions that impacted their profitability.

Law firms are scrambling into the industry because legal and arbitration costs on complex cases cost taxpayers an average $8 million US and can exceed $30 million US, according to the authors.

The report also shone a light on U.S. and European investment banking firms that have become part of an “established and unregulated part of the international investment arbitration industry” that is fuelling the growth in arbitration cases by funding corporate actions in exchange for a share of the bounty from a positive ruling or lucrative settlement.

The paper also said the threat of legal action has put a “chill” on governments that stymies public policy decisions in areas like the environment and health.

“Canada, for example, did not pursue certain anti-smoking policies after Big Tobacco threatened to seek compensation,” the authors stated in an assertion also made in a 2008 paper by Physicians for a Smoke-Free Canada.

The arbitration’s supporters, meanwhile, argue that investor protection agreements, which are overwhelmingly supported by the Canadian business community, facilitate Canadian businesses operating abroad and help poor countries attract job-creating investment.

They also point out the relative weak results even for companies that eventually win after making staggering claims under investor-protection treaties. Lone Pine Resources recently made headlines after claiming $250 million in damages in its NAFTA case responding to Quebec’s policies in relation to hydraulic fracturing, also known as fracking.

Washington and Lee University School of law professor Susan Franck recently cited statistics showing that companies claimed an average of $371 million in lost profits — but those that won took in an average of $21 million.

But Osgoode law professor Gus Van Harten, whose research was cited in last week’s critical report, argues that the fact states win just over half the cases doesn’t prove the arbitration system has no pro-investor bias.

“This is a very dubious conclusion,” stated Van Harten, who speculates that investors’ success rate would be significantly lower if they were relying on traditional domestic courts.

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Prime Minister Stephen Harper looks as Minister of Foreign Affairs John Baird, left, shakes hands with Chinese President Hu Jintao before their meeting at the Great Hall of the People in Beijing in February. Economic deals with China and the EU will amplify the booming business of investor-state dispute arbitration, a new report says.

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